It's Still 'Binfield For Bankers'

The Banks Are Not Safe As Houses


Pleiades wanted me to have a look at something today to do with banks in the AFR. It's behind a pay wall so I can't really be copying and pasting the whole thing, but I want to share some things he wanted me to see:

The big four had been desperately pleading for APRA to kick the FSI's all-important capital and risk-weight can down the road at least 12 to 24 months. In its response, CBA amusingly had the regulator considering the recommendations through to 2018. Perfect for 27 times leveraged big bank bosses that can continue punching out 19 per cent returns on equity until policymakers wake up. 

That leverage number, by the way, is based on APRA's latest estimate of the big banks' assets divided by APRA's calculation of their common equity tier one capital as at December last year. Another way of expressing the same point is that the majors carry real, or non-risk-weighted, equity capital of just 3.7 per cent of assets. Perversely, you cannot get a home loan from the same banks providing that little equity, with most capping loan-to-property value ratios at 95 per cent.

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During a briefing with Murray for a panel session at The Australian Financial Review's Banking & Wealth Summit this week, he said it was "incredible" that the equity the majors hold against their home loans was completely destroyed in APRA's 2014 stress tests. The better capitalised regional banks had no such difficultly and were able to cover the losses flowing from the simulated defaults in a 1991-like downturn. 

The result should not, though, have been surprising. One only needs to read Westpac's response to Murray's report. The $114 billion bank revealed it only holds "capital of 1.32 per cent" against $468 billion of home loans (see second chart). That means Westpac is leveraging its wafer-thin equity 77 times when extending half a trillion dollars of finance to home owners, which is exactly the same leverage estimate we calculated in this column in July last year. Imagine how Westpac would react if you told them you could only provide a 1.3 per cent deposit for your home.

Which is to say the big 4 banks are really leveraged to the max on the strength of the Too Big To Fail guarantee. During the GFC, the Federal government under Kevin Rudd made courageous decisions to shore up the Big 4 banks plus Macquarie so they wouldn't collapse. By that, we mean so that something like 70% of Australians wouldn't lose their savings and deposits in a flash. Since then there's been BASEL and BASEL II to make sure banks held enough capital, but of corset was voluntary for the big banks to sort outlier ledgers. Somehow -  unsurprisingly - the Big 4 banks have dawdled on sorting out this issue and remain utterly vulnerable to the kind of seismic shift in the market place that could deprive them of liquidity or place them on the wrong end of a big margin call.

Which is kind of scary. The Federal Government under Tony Abbott might not be in a position to shore them up for ideological reasons or simple lack of brainpower or excessive love of  laissez faire neo-classical economics. Unlike under the ALP where they pulled out all the stops to make sure the banks didn't explode, this is a government that made all the noises to ensure Ford and General motors and Toyota gave up manufacturing automobiles in Australia for ideological reasons ("ending the age of entitlement!"). If something should happen, they will necessarily fuck it up because it's not so much in their blood or DNA, but in their defective ideology and therefore headspace.

Still, I shouldn't be slamming them for the fuck-ups of the Christmas Future they are yet to make. Nonetheless those Westpac figures are terrible. They sit as a grim warning to the irrational exuberance surrounding property prices in Sydney. And while it's having a difficult time figuring out a scenario in which the property Bubble pops in Sydney, if that should happen, it's going to be the Armageddon of banks we all feared when the GFC broke. 8years on, they've done nothing to fix the deer problem and set themselves up for bigger fall instead. What on earth were they thinking?

Sometimes these bankers and central bankers and prudential regulatory authority people live in a cloud of their own with gilded cages and distorted perspective. It's even more disturbing that they probably donate more towards the conservatives in the hopes of less regulation and after a generation of less and less regulation and oversight, they've created the current precarious position. Australia's economy might be advanced and post-industrial, but it is small. If the world's central banks are in Zero Interest Rate Policy land and can't get out of it, it's reasonable to think that Australia will be dragged down to that level. At a certain point there is no horizon for future growth - we'll arrive at the effective endpoint of development like the rest of the advanced economies have done. At which point it's conceivable that the only thing that can grow are house prices independent of any other economic indicator, and that is what is happening in Sydney - there is nothing but property to speculate upon, and that is why all the money is being printed by banks to place bets.

It sure is bleak.

Binfield For Bankers - 15/01/10

"The Nerve Of The Guy!"

Lloyd Blankfein, head of Goldman Sachs, the leading investment bank that led the markets to the brink in the GFC says he's sick of apologising for it.

Called to Washington on Wednesday to testify before the Financial Crisis Inquiry Commission, Mr Blankfein made it plain that he was done apologising.

The commission chairman, the former treasurer for California, Phil Angelides, pointed out that some regarded Goldman's behaviour - in which the firm sold mortgage securities to customers and then placed bets against those same - was ''the most cynical'' of practices.

''It sounds to me a little bit like selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars,'' said the chairman.

''That's what a market is,'' Mr Blankfein said.

''I do know what a market is,'' Mr Angelides replied sourly. He tried again to get Mr Blankfein to acknowledge that ''excessive risk was being taken''.

''Look, how would you look at the risk of a hurricane?'' the man from Goldman retorted.

''Acts of God we'll exempt,'' Mr Angelides said. ''These were acts of men and women.''

What do you do with people like this? I'm surprised there isn't  vigilante group out to find where he lives and fire bomb his property.Not that I'm advocating it, but you wouldn't be surprised if it happened.

CBA's Profit Upgrade

Get this. The CBA has made a huge pile of money in a year of the GFC.They've upped their profit forecast by a dirty big margin, sending their shares up 2.31% in the last 15minutes of the trading day.

Key drivers of the result were the solid income growth across the business, good volume growth, disciplined cost management and a decline in impairment expenses, the bank said.

Also helping the result was a positive return of $240 million after tax as equity markets recovered over the six month period.

The profit forecast shows that CBA has rebounded from the slowdown associated with the global financial crisis, and is driving earnings higher with its biggest market share in home loan lending and deposits.

EL&C Baillieu analyst Stewart Oldfield said CBA is just getting stronger.

‘‘They have got the premier retail franchise in the country and it’s a case of the strong getting stronger,’’ Mr Oldfield said. ‘‘In an environment post the GFC the strongest have just gotten stronger.’’

I guess it's a company that won't be allowed to fold, so you would buy their shares.  Lots of institutional buyers in that one, judging from the volume. It's about recaptured its peak from just before the GFC.

So seriously, what exactly the hell was the GFC to Australia? Iceland's been completely shafted by the GFC and here's Australia sailing smoothly as if nothing had ever happened. Take this column on unemployment.

Yesterday’s confirmation of labour market strength makes a return to neutral monetary policy a given. It used to be thought that a neutral cash rate was about 5 per cent, but the banks boosting lending rates by more than the RBA’s official increases has lowered that a touch. And with higher personal debt loads, it’s arguable that the RBA doesn’t have to do as much to achieve its desired impact on purses and wallets.

So, pick another number. Maybe neutral now is more like 4.5 per cent, just three more consecutive monthly rate rises of 25 points and we’d be there.

And, as the RBA has reminded us, just because it hasn’t done something before, it doesn’t mean it won’t do it.

Also remember that the unemployment rate is supposed to be a lagging indicator, in which case the extraordinary straight-line employment growth since June is all the more amazing, even while being the sort of performance that naturally has any graph watcher thinking that there must be some sort of pause at some stage.

In other words, if you're an employer, the labor market is tight, inflation is knocking on the door, the economy is right back to the point where it is about to overheat, as it was in July 2007.  It's worth asking, what exactly the hell was the GFC and all that drama? Because as of today, it's looking like it never happened for the big banks.